November 2, 2023/FBNQuest Research
According to the CBN’s most recent Quarterly Statistical Bulletin (QSB) for Q2 ’23, deposit money banks (DMB) total credit lending to the economy rose sharply by 24% q/q (+40% y/y) to NGN37.5trn in Jun ’23. This compares with a slight contraction of -1% q/q in the preceding quarter. It is important to note that the impressive q/q growth in Q2 ’23 was due to the increase in the foreign currency-denominated portion of the sector’s loan book. This expansion was a direct result of the CBN’s decision to float the naira, which led to its devaluation by c.40% in Jun ’23.
Consistent with the historical loan book allocation pattern, the oil and gas sector was the leading beneficiary of banks’ credit lending.
However, since a sizable proportion of credit to the upstream oil and gas segment is dollar-denominated, its share of DMB’s loan book increased to 25.9% in Q2 from 22.5% in Q1 ’23.
This shift was primarily due to the downward adjustment of the naira exchange rate. As a result, the sector experienced the fastest loan growth of all sectors, with a 42% q/q increase.
The manufacturing sector remained the second-largest recipient of DMB credit, accounting for 18.6% of the total credit. Following the impact of devaluation, credit growth to the sector increased by 23% q/q.
Financial and insurance, general services, as well as trade & general commerce also represented substantial proportions of DMBs’ total credit extension, accounting for shares of 9.3%, 8.3%, and 7.7% respectively.
Notably, credit growth to the government shrunk to 6.4% from 8.6% in Q1 ’23. This was primarily driven by a -7% q/q decline in banks’ lending to the government.
Based on the Q3 ’22 earnings results of some banks, we see that their loan books experienced single-digit growth q/q. This growth, along with an increase in net interest margins, contributed to the strong growth in funding income, pre-provision profits, and earnings.
Going forward, we continue to expect banks to benefit from the elevated interest rate environment.
